Quiz 4: Chapter 5 & 6

lower

VIEs are often eligible for ___________ interest rates

yes

are intra-entity transactions between the primary beneficiary and the VIE eliminated in consolidation?

a b

in preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is a. excluded from net income b. excluded from inventory in the consolidated balance sheet c. included in inventory in the consolidated balance sheet d. included as part of net income

100%

in the presence of at 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation?

a c d

in the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, the Consolidation Entry TA a. ensures the exclusion of the intra-entity gain in the consolidated income statement b. increases accumulated depreciation for the amount of the intra-entity gain c. restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books d. restores the historical cost balance for the transferred asset

guarantee

primary beneficiary may ___________ the VIE's debt, assuming the risk of default

upstream

similar to gross profits from intra-entity inventory transfers, the income effect of consolidation entries on the noncontrolling interest is seen in ______________ transfers

less

subsequent to acquisition, when a parent acquires the outstanding noncontrolling interest shares of it subsidiary, credit to the parent's additional paid-in capital is needed whenever the cash paid to reacquire the noncontrolling shares is _____ than the consolidation value of the noncontrolling interest

the consolidated income statement and comparative balance sheets

the accounts and amounts used to prepare a consolidated statement of cash flows are based on..

decrease

the presence of intra-entity upstream inventory gross profits serves to _______ the amount of the consolidation entry &*C worksheet adjustment

removes the effects of intra-entity sales and purchases for the consolidated reporting entity

the purpose of consolidation entry TI is to

true

true/false intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests

true

true/false the direction of an intra-entity inventory transfer (upstream or downstream) does not affect the sales/purchase consolidated worksheet elimination

when variable interests allow a primary beneficiary to exercise financial control over a variable interest entity

when is a majority voting interest not effective in identifying a controlling financial interest in an affiliated entity

retired

when one affiliate within a consolidated group acquires the debt of another affiliate from a third party, from a consolidated view this liability is effectively ___________ as of the debt reacquisition date.

carrying

when one affiliate within a consolidated group acquires the outstanding bonds (originally issued at a discount) of another affiliate from a third party. The consolidated gain or loss on the effective retirement is computed by comparing the price paid for the bonds purchase to the bond's __________ value

the subsidiary's retained earnings

when the parent applies equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry &*G involves a credit to COGS to recognizes the intra entity gross profit in beginning inventory and a debit to

to accomplish a well-defined and limited business activity to provide low-cost financing

why does an enterprise create a VIE?

a c

why does the consolidated entry &*G debit the parent's investment in subsidiary account instead of its retained earnings account for downstream intra-entity gross profits in beginning inventory when the parent employs the equity method? a. the debit to the investment account is needed to bring the account to a zero balance in consolidation b. the investment in subsidiary account is overstated by the amount of the intra-entity beginning inventory gross profit c. the equity method removes intra-entity gross profits from the parent's books causing its RE to properly reflect the consolidated balance.

combine the effect of any dilutive securities with basic earnings per share

how do you calculate dilutive EPS?

b c d

in period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate account continue to be misstated from a consolidated perspective> a. gain on a sale from the intra-entity transfer b. accumulated depreciation c. depreciation expense d. retained earnings of the selling affiliate

a b

in the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry ED a. reduces accumulated depreciation for the current year's overstatement of depreciation expense b. removes the overstatement of expense resulting from depreciating the inflated transfer price of the transferred asset c. includes depreciation expense on the entity transfer price of the transferred asset d. increases accumulated depreciation for the amount of the intra-entity gain

decreases

in years subsequent to an intra-entity depreciable asset transfer from a subsidiary to its parent (at a gain), Consolidation entry &TA removes the gain from retained earnings account of the seller. in each successive year, the amount of the consolidation entry &TA debit to retained earnings -remains the same -decreases -increases

posted

intra-entity gross profits in beginning inventory require adjustments in the current consolidation worksheet because the previous year's consolidation entries are never _____________ to the individual affiliates' books

depreciation expense

intra-entity gross profits in ending inventory are recognized in consolidated net income through a credit to COGS when the inventory is sold to outsiders. As a intra-entity transferred asset is used in the production process, the intra-entity gain is recognized in consolidated net income by consolidation entries that credit ____________________________

intra-entity transfer

the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole

c d

under what general conditions does an entity qualify as a variable interest entity? a. equity investor's returns are capped by contractual arrangements with variable interest holders b. voting rights are unable to direct the decision-making activities of the entity c. there is insufficient equity at risk to enable the entity to finance its activities without additional support d. the equity investors lack the ability to exercise financial control over the entity

revenues COGS Net income attributable to the noncontrolling interest retained earnings at the beginning of the year inventory noncontrolling interest in subsidiary at end of year

what accounts are affected by intra-entity transactions?

consoldiated

when the parents employs the equity method of accounting for its investment in subsidiary account in consolidated financial reports the parent's retained earnings account will equal _________________ retained earnings

inability to secure financial without additional subordinated support a lack of either risk of loses or entitlement to residual returns

VIE characteristics (2)

IFRS

has one model for all entities regardless of whether control is evidence by voting interests or variable interests

GAAP

has separate models for assessing control for variable interest entities and voting interest entities

according to other variable interests

how are risks and reward distributed from a VIE to its primary beneficiary?

c d

how do gross profits resulting from upstream inventory transfers affect the computation of consolidated net income attributable to the noncontrolling interest? a. beginning inventory gross profits decrease the noncontrolling interest's share of consolidated net income b. ending inventory gross profits increase the noncontrolling interest's share of consolidated net income c. beginning inventory gross profits increase the noncontrolling interest's share of consolidated net income d. ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income

b c

which of the following consolidated balances remains the same regardless of whether intra-entity gross profit in inventory results from upstream or downstream transfers? a. noncontrolling interest b. consolidated net income c. inventory d. net income attributable to the controlling interest

G

which of the following consolidation entries has the net effect of decreasing the current period's consolidated net income? G &*G TI

voting

in periods subsequent to the obtaining of financial control, a primary beneficiary's consolidation of its VIE follows the same general process as if the entity were consolidated based on _________ interests

b c

in preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because a. COGS is overstated by the amount of the gross profit on intra-entity inventory transfers remaining at year-end b. the ending inventory credit component of COGS is overstated by the intra-entity gross profit remaining at year-end c. the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit d. it creases the gross profit recognized on the sales to outsiders

a b d

in the year of an intra-entity deprecialbe asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to a. remove the gain on sale from the intra-entity asset transfer b. return the asset to its historical cost to the consolidated entity c. remove the asset from the consolidated balance sheet d. remove the effect of the intra-entity gain on depreciation expense

true

true/false assuming no carryover balance from operating accounts acquired in a previous year business combination, no special adjustments are required to prepare a consolidated statement of cash flows in periods subsequent to a business combination.

the voting interest model is applied to determine whether an enterprise must consolidated the entity

what if an affiliated entity is determined not to be a variable interesting entity, what happens then?

because no sale of the asset occurred with an outside entity

why are the accounting effects of intra-entity depreciable asset sales removed in consolidation?

very limited assets governing documents can strictly limit the actions of a VIE

why doe VIEs typically get lower interest rates?

does not

if a less-than-100% owned subsidiary has dilutive securities in its capital structure, the parent's share of subsidiary earnings use in deriving diluted EPS __________________ (may/does not) change when assuming the conversion of the dilutive securities

the 100% deferral ensures that none of the intra-entity gross profit will be attributable to the noncontrolling interest

in applying the equity method, why does the parent defer 100% of the intra-entity inventory gross profits from downstream transfers even when owning a controlling, but less-than-100% ownership in the subsidiary?

b c

inventory transfers amount affiliates within a consolidated entity a. are always recorded at original cost to the consolidated entity b. create neither profits nor losses to the consolidated entity c. produce accounting effects that are eliminated in the preparation of consolidated financial statements d. are included in the computation of consolidated net income

when intra-entity sales remain in ending inventory, control of the goods has not changes

what is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year-end?

increases

when a bond is issued at a discount, the amount of the discount is amortized periodically. The discount amortization process increases interest expense and ________________ the carrying amount of the bonds payable

a b c

when intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements? a. recognize appropriate income effects from the sale and use of itra-entity transfer assets b. defer intra-entity gains from intra-entity depreciable assets sales c. re-establish historical cost balances for the transferred assets d. value depreciable assets at their intra-entity transfer prices in the consolidated balance sheet

a b c

when the parent applies the equity method and routinely acquires inventory upstream from a subsidiary, which of the following consolidation entries are sometimes needed to bring the investment in subsidiary account to a zero balance a. I b. D c. S d. &*G

100

when the parent applies the equity method and routinely transfers inventory downstream to its 80% owned subsidiary, any intra-entity gross profits remaining in the consolidated entity's ending inventory, are allocated ___________% to the parent company's share of consolidated net income

c

when the parent applies the equity method and routinely transfers inventory downstream, any intra-entity gross profits remaining in the consolidated entity's ending inventory a. increases the noncontrolling interest b. decreases the noncontrolling interest c. does not affect the noncontrolling interest

the investment in subsidiary account

when the parent applies the equity method and routinely transfers inventory downstream, the Consolidation Entry &*G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debt to

the effective retirement of the debt has not been recognized on either of the affiliated company's books

why in years subsequent to the acquisition of debt of one affiliate by another affiliate, consolidated worksheet entries continue to be necessary?

d

how does the direction of intra-entity land transfers affect the computation of the noncontrolling interest's share of consolidated net income? a. neither upstream nor downstream inventory land affect the computation b. downstream land transfers affect the computation c. both upstream nor downstream land transfers affect the computation d. upstream land transfers affect the computation

10

in evaluating an entity's status as a VIE, if equity at risk is less than ____% of total assets, the risk is deemed insufficient and the entity is considered a VIE

a b

in periods subsequent to an intra-entity depreciable asset transfer (at a gain), consolidation entry &*TA is modified when the parent applies the equity method and the transfer was downstream. the modification replaces the adjustment to the parent's retained earnings with an adjustment to the investment in subsidiary account balance a. the debit to the investment in subsidiary account is needed to bring that account to zero in consolidation b. the equity method has already reduced the parent's retained earnings for the intra-entity gain c. the equity method adjusts for any excess accumulated depreciation d. the equity method ignores intra-entity gains on transfers of depreciable assets

true

true/false in periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry ED debits accumulated depreciation and credits depreciation expense for the current year's portion of the intra-entity gain on sale

true

true/false the parent's accounting method choice has not effect on the ultimate totals reported in consolidated financial statements

the intra-entity gain is recognized as a part of consolidated net income in the period that the land is sold to the outside entity

when intra-entity transferred land is subsequently sold to an outside entity, how is the originally deferred intra-entity gain on sale reported in consolidated financial statements?

a

when the parent employs the initial value method to account internally for its invesment in subsidiary account, a consolidation conversation entry is typically needed. consolidation entry *C converts the parent's beginning RE balance to a full accrual basis. if the subsidiary purchases inventory from the parent and intra-entity gross profits exist in its beginning inventory, what is the effect on the consolidation conversion entry *C? a. downstream intra-entity inventory gross profits has no effect on consolidation entry *C b. intra-entity downstream inventory gross profits will decrease the amount of the consolidation entry *C worksheet adjustment c. intra-entity downstream inventory gross profits will increase the amount of the consolidation entry *C worksheet adjustment

no

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both company have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4 shows _______________ difference in consolidated totals resulting from the investment accounting choice

a b c

Consolidation Entry B adjusts which of the following account generated by the affiliates preparing consolidated financial statements in the year of an intra-entity bond reacquisition? a. gain (or loss) on retirement of bonds b. investment in bonds c. bonds payable d. retained earnings

$100,000

Baker company owns 80% of the outstanding voting stock of walden company. during the current year, intra-entity sales amount to $100,000. these transaction were made with gross profit rate of 40% of the transfer price. in consolidating the tow companies, what amount of these sales would be eliminated?

the investment in subsidiary account

in periods subsequent to an intra-entity depreciable asset transfer (at a gain), consolidation entry &*TA is modified when the parent applies the equity method and the transfer was downstream. the modification replaces the adjustment to the parent's retained earnings with

a

a gain or loss from reacquisition of the debt of one company by an affiliated firm a. is typically recognized via a consolidated worksheet entry rather than an entry on the individual books of an affiliate b. is typically not recognized through an entry on the individual books of an affiliate c. is typically not recognized on consolidated financial statements

both COGS and subsidiary's RE are decrease

a parent uses the initial value method, acquires inventory from its subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of the intra-entity gross profits in beginning inventory on consolidation entry &*G?

increase

a potentially dilutive security will not be considered in the computation of diluted EPS if the effect of its inclusion in the diluted EPS calculation is to _________ EPS

downstream inventory transfers

when the parent employs the equity method, Consolidation Entry *G debits investment in subsidiary account for intra-entity gross profit in beginning inventory that resulted from?

entry G

based not on total intra-entity sales but only on the amount of transferred merchandise retained within the business at the end of the year

b

because consolidation worksheet entries are not posted to any affiliate's individual account records, intra-entity ending inventory gross profits from the previous year appear in the subsequent year's beginning inventory of the affiliate who now possesses the inventory. to correct for the presence of intra-entity profits in beginning inventory, Consolidation Entry *G a. increases the inventory account b. reduces COGS c. increases COGS d. decreases the inventory account

must be the primary beneficiary

how can an entity consolidate a VIE?

downstream --> does not affect upstream --> noncontrolling interest only receives their portion of the profits

how do intra-entity profits present in any year affect the noncontrolling interest caluclations?

diluted

if any dilutive convertibles are present, _____________ EPS also must be present

controlling

in allocating the income effect of a gain or loss from retirement of the debt of one affiliate that has been purchased by another affiliate, the entire income effect is allocated to the ____________ interest

intra-entity transfer

the internal movement of inventory that creates no net change in the financial position of the business combination taken as a whole

increases

variable interests _________________ a firm's risk as the resources it provides (or guarantees) to the VIE increase.

decreases

when a bond is purchased at a premium, the amount of the premium is amortized periodically. The premium amortization process decreases interest income and _______________ the Investment in Bonds account

retained earnings

when a subsidiary has both common and preferred shares in its capital structure, consolidation is made simpler by combining Consolidation Entries S and A because no allocation of the subsidiary's ____________ ____________ to preferred and common shares is required

when it is paid to the noncontrolling interest

when are subsidiary dividends considered a cash outflow?

c d

when intra-entity profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements? a. there is not effect on consolidated net income as a result of intra-entity gross profits in beginning inventory b. the net income effect of the intra-entity inventory gross profit is transferred from the current period to the prior period c. the net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period d. consolidation entry &*G credits COGS which increases current period's consolidated net income

a d

in periods subsequent to an asset transfer from a subsidiary to its parent at a gain, what effects continue on the seller's and buyer's book from a consolidated reporting perspective? a. retained earnings of the seller are overstated b. retained earnings of the buyer are overstated c. retained earnings of the seller are understated d. retained earnings of the buyer are understated

investing

cash purchases of businesses are an ______________ activity

no

does VIE common stock provide control?

if can exercise financial control over the VIE in its role as primary beneficiary

a business enterprise is required to consolidate the assets, liabilities, and results of operations of a VIE in which it holds no equity interest if...

equity

changes in parent's ownership interest, if controlling interest is retained, are accounted for as _______ transactions and no gain or loss is reported of the consolidated entity.

b d

consolidation worksheet entries are not posted to the books of the members of the consolidated group. therefore, in years subsequent to an upstream intra-entity land sale that records a gain, a consolidation worksheet entry is needed to adjust a. the gain on sale account b. the land account c. the retained earnings beginning balance for the company that acquired the land in the transfer d. the retained earnings beginning balance for the company that originally recorded the gain on sale of the land

a

when a parent applies the equity method and upstream intra-entity gross profits exists in the beginning inventory, the debit to the subsidiary's retained earnings account in consolidated entry S a. will decrease by the debit to the subsidiary's retained earnings account in consolidation entry &*G b. will increase by the debit to the subsidiary's retained earnings account in Consolidation entry &*G c. is unaffected by Consolidation entry &*G